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UK GDP growth accelerates past France and Italy

Today brings us the latest data on the UK economy or to be more specific the economic growth or Gross Domestic Product number for the second quarter of this year. If you are thinking that this is later than usual you are correct. The system changed this summer such that we now get monthly updates as well as quarterly ones. So a month ago we were told this.

The monthly GDP growth rate was flat in March, followed by a growth of 0.2% in April. Overall GDP growth was 0.3% in May.

So we knew the position for April and May earlier than normal (~17 days) but missing from that was June. We get the data for June today which completes the second quarter. As it happens extra attention has been attracted by the fact that the UK economy has appeared to be picking-up extra momentum. The monthly GDP numbers showed a rising trend but since then other data has suggested an improved picture too. For example the monetary trends seem to have stabilised a bit after falls and the Markit PMI business survey told us this.

UK #PMI points to a 0.4% rise in Q2 #GDP tomorrow, but that still makes the Bank of England’s recent rate rise look odd, even with the supposed reduced speed limit for the economy. Prior to the GFC, 56.5 was the all-sector PMI ‘trigger’ for rate hikes. July 2018 PMI was just 53.8 ( @WilliamsonChris _

As you can see they are a bit bemused by the behaviour of the Bank of England as well. If we look ahead then the next issue to face is the weaker level of the UK Pound £ against the US Dollar as we have dipped below US $1.28 today. This time it is dollar strength which has done this as the Euro has gone below 1.15 (1.145) but from the point of view of inflation prospects this does not matter as many commodities are priced in US Dollars. I do not expect the impact to be as strong as last time as some prices did not fall but via the impact of higher inflation on real wages this will be a brake on the UK economy as we head forwards.

Looking Ahead

Yesterday evening the Guardian published this.

Interest rates will stay low for 20 years, says Bank of England expert

Retail and wholesale trade were the largest contributors to growth, at 0.11 percentage points and 0.05 percentage points respectively. Computer programming had a growth of 1.9%, contributing 0.05 percentage points to headline gross domestic product (GDP).

There was also some much better news from the construction sector and even some rebalancing towards it.

Growth of 0.9% in construction also contributed positively to GDP growth.

Although of course these numbers have been in disarray demonstrated by the fact that the latest set of “improvements” are replacing the “improvements” of a couple of years or so ago. Perhaps they have switched a business from the services sector to construction again ( sorry that;s now 3 improvements).So Definitely Maybe. Anyway I can tell you that there are now 40 cranes between Battersea Dogs Home and Vauxhall replacing the 25 when I first counted them.

Today’s sort of humour for the weekend comes from the area to which according to Baron King of Lothbury we have been rebalancing towards.

However, contraction of 0.8% in the production industries contributed negatively to headline GDP growth…….

Manufacturing fell by 0.9% although there is more to this as I will come to in a moment.

Monthly GDP

You might have assumed that the June number would be a good one but in fact it was not.

GDP increased by 0.1% in June 2018

If we look into the detail we see that contrary to expectations there was no services growth at all in June. Such growth as there was come from the other sectors and construction had a good month increasing by 1.4%. I did say I would look at manufacturing again and it increased by 0.4% in June which follows a 0.6% increase in May. So we have an apparent pick-up in the monthly data as the quarterly ones show that it is in a recession with two drops in a row. Thus it looks as if the dog days of earlier this year may be over,

This leaves us with the problem of recording zero services growth in June. The sectors responsible for pulling the number lower are shown below.

The decline of the retail trade whilst the football world cup was on seems odd. Also there overall number completely contradicts the PMI survey for June which at 55.1 was strong. So only time will tell except Bank of England Governor Mark Carney may need its barman to mix his Martini early today as he mulls the possibility that he has just raised interest-rates into a service-sector slow down.

One consistent strong point in the numbers in recent times has carried on at least.

There was also a rise in motion pictures, increasing by 5.8% and contributing 0.05 percentage points.

So we should all do our best to be nice to any luvvies we come across.

Comment

We should welcome the improved quarterly numbers as GDP growth of 0.4% is double that of both France and Italy and is double the previous quarter. However whilst the monthly numbers do provide some extra insight into manufacturing as the recessionary quarterly data looks like a dip which is already recovering the services numbers are odd. I fear that one of my warnings about monthly GDP numbers are coming true as it seems inconsistent with other numbers to say we picked up well in May but slowed down in June. If we look at the services sector alone and go back to February 2017 we are told this happened in the subsequent months, -0.1%,0.3%-0.1%,0.3% which I think speaks for itself.

We also got an update on the trade figures which have a good and a bad component so here is the good.

The total UK trade deficit (goods and services) narrowed £6.2 billion to £25.0 billion in the 12 months to June 2018. The improvement was driven by both exports of goods and services increasing by more than their respective imports.

Next the bad.

The total UK trade deficit widened £4.7 billion to £8.6 billion in the three months to June 2018, due mainly to falling goods exports and rising goods imports.

If you want a one word summary of out recorded trade position then it is simply deficit. Although currently we are looking rather like France in terms of patterns as a reminder that some trends are more than domestic.

Foxy, “meaningless” is a bit of an overstatement. I don’t know of any national statistical institute that publishes confidence intervals for real GDP. It isn’t easy to do for particular surveys, and probably isn’t operable for a statistic compiled from multiple surveys. The UK real GDP estimates are more ambitious than most in trying to reconcile separate estimates based on output, expenditure and income. The latest quarterly update says: “Alignment adjustments, found in Table M of the first quarterly estimate of GDP datasets in this release, have a target limit of plus or minus £2,000 million on any quarter.” This is in terms of the nominal GDP estimates, not the real GDP estimates. In 2018Q2 the income estimate was higher than the expenditure estimate so the expenditure estimate was boosted by £1,302 million, all of it going to changes in inventories and the income estimate drawn down by £732 million, all of it coming from gross operating non-financial corporations. Do the math and that’s a £2,034 million discrepancy, so the £2,000 target limit doesn’t have to be rigidly respected. The fact that it is over target suggests there was massaging of other components to keep the discrepancy to just £2,000. Switch to real GDP and there was a £1,261 million boost to the chained volume measure of changes in inventories in 2018Q2 following on a £2,849 million cut in the chained volume measure of changes in inventories in 2018Q1. So these adjustments amounted to a £4,110 million boost to the change in real GDP as measured by expenditures from 2018Q1 to 2018Q2, which seems like a lot. Its actually the biggest such change for all the alignment adjustments shown.

I understand that these numbers are revised months, years and even decades after so there can be what is in effect large underlying errors which are not apparent at the time.

As to basis I’m thinking mostly of the financial sector where I understand that the national income accountants have struggled for decades to find a way of measuring the contribution of the sector and the figures used are estimates.

However, as a significant part of the activity of the finance sector is concerned with transferring titles to assets that already exist there is arguably no value added in this procedure (and GDP is supposed to measure value added) and many think that the financial sector makes a negative contribution to GDP and the national accounts should reflect this. This is no small matter.

It’s not just the finance sector, Bob, measuring the economic value of all services is fraught with traps.
Value added activity is closely associated with wealth creation and its seems sensible to assert this can only apply to manufacturing, and possibly also mining, and agriculture. Everybody else just moves the wealth around from one person to another. On the other hand all labour has some economic value and I guess GDP measurement tries to take account of both economic value and wealth creation.

Mark Twain suposedly said that the people of the Isles of Scilly used to eke out a living by taking in each others’ washing.

For my money it’s wealth creation that really matters; the economic value of labour should only count towards GDP if the labour is exported. The Scilly Isles would be a wealthy place if they washed for Wales.

With the £ weak against the euro and dollar our exports should be booming but they aren’t. However German factory orders were gone worse lately, there is no doubt about it imo things slowing down again despite GDP figures of 0.4%.

Retail needs far more scrutiny, the warm weather and world cup boosted retail but its benefitted food retailers the most non food retailers are struggling, consumers are cautious on high ticket items.

Joe Public concerned over BREXIT the weak £ is driving costs in retail higher, there will be more blood on the carpet in retail.

The £ still fallen despite 0.4% GDP says it all, the numbers need far more scrutiny, overall I don’t think the markets over impressed with the numbers released today.

There was a switch today in the whilst the King Dollar swept all before it the Euro was hit harder than the £ because of the links that some European banks have with Turkey. In case anybody missed it the Turkish Lira was hammered today. So we did nearly get back up to 1.12 versus the Euro.

As to exports it takes a while to kick in and initially the terms of trade move against you so we are still in the spell affected by the period when the £ bounced back. But yes we continue to see numbers which are weak and that theme has never really gone away.

Completely off topic, but did you see that the fall in the Turkish lire overnight has caused the ECB concern about the financial stability of three big banks (Unicredit, BBVA and BNP). How on earth can we be in a position where these banks have passed any sort of stress test if they are relying on repayment of Turkish loans to stay alive?
have they learned nothing over the last ten years?

Just to say that an Iberia specialist that I chat to on Twitter ( @WEAYL) has been warning about BBVA for several weeks now. It’s share price has lost around 2 Euros since the end of January including the 33 cents today leaving it at 5.61 Euros.

As i mentioned on Twitter, the best reader response to the McCafferty interview was “in other words, he doesn’t know and his predictions are pure guesswork.”

Really, it is mostly Bobski the builder getting back to work and doing overtime in the good weather. Manufacturing is probably gaining from the GBP’s fall, but as it slips past USD 1.28 and e1.12, Carney will have to follow the next Fed rise, so that effect will soon disappear, especially with eurozone consumer demand weakness.

A while back I met an ex-colleague for lunch and he said what happened to “As”? It took me a second or two to realise he had shortened the nickname of “As expected” which McCafferty was called. That was a nickname along the lines of someone 6 foot 6 being called shorty……

Hi Shaun,
I took Ian McCafferty’s “forecast” as an admission that ultra monetary policy has failed in the sense that the credit crunch caused permanent damage to the banks and the economy, and 0.5% bank rate and all that QE only mask the damage, not fix it.
Of course a banker might say that 20 or 30 years is only temporary . Still, it’s too long to look through.

Yes I take your point. It was all supposed to be over years ago which with the events in Turkey today and Bucharest tonight reminds me that so was the first world war. Over by Christmas wasn’t it? Although I think the British Foreign Secretary was more on the ball.

“‘The lamps are going out all over Europe, we shall not see them lit again in our lifetime’. ”

I just took a look at the NZ Herald and noted it reporting on a falling Kiwi Dollar which made me wonder if the news from Turkey has reached down there as you guys are already well into the weekend?

I agree with this assessment. I liken the economy to a balloon. If you push it in here, it will poke out there. What you are trying to fix will always result in another affect somewhere else, even if it wasn’t the one you necessarily wanted or even forecast.

I would say their actions 1. saved the banks…tick 2. saved the rich and the hoarders of wealth in bonds…tick 3. Boosted asset prices and provided some ‘wealth effect’ giving the pretense of economic activity….tick

BUT, the impact this time around (they pat themselves on their backs for having avoided another Great Depression by their actions) will be a longer burn for historians to mull over. It has resulted in a demographic and social disaster. The seeds are being sown for social unrest and the breakdown of society. When the young grow old and find they still have no stake in society, that will not be a healthy place. In fact I liken the current period to the mid 1930’s. Growing currency wars have turned into trade wars, anti immigration parties and extremes of left and right appearing on the scene. A collapsing birth rate and slowing life expectancy gains behind the scenes tell the real story.

Where it ends who knows. But if they want to avoid problems, they can’t just lecture people, they need to collapse house prices, limit landlordism, implement Land Taxes to improve land utility and provide a decent State pension or Citizens’ Income for all as a start. This is not ‘radical’ or ‘left wing’, these are Georgist policies (see Henry George) much hated by those with. But the alternative going forward will be worse.